When the news spread that gold was discovered in California in the middle of the 19th century, one prospector after another rushed to the West coast of the United States in search of instant fortune. This was the beginning of the American gold rush, and even today's San Francisco's NFL team is named the 49ers in commemoration of the year 1849, when the fabled gold rush began.

Though the areas where gold was found in California were limited, the people who went West were the pioneers of the whole region. In many respects, the recent speculative spree to invest in venture businesses in Korea appears like the American gold rush of the 19th century. An ever increasing number of Koreans are focusing their attention on venture businesses, to which an expanding volume of manpower and capital resources are being attracted. Indeed, it is no exaggeration to say that the current trend of investing in venture businesses in Korea is a kind of business revolution.

This recent venture boom began with technology-intensive industries such as electronics, information, and telecommunications, and has since spread to peripheral sectors, including fashion, advertising, and various services. The venture business revolution is gaining momentum in concert with such recent developments as the country's stepped-up efforts to create more jobs, various government incentives, popular expectations for the realization of an American-style "new economy," and a paradigm shift from analogue to digital technology.

The relative significance of venture firms and small and medium sized businesses in both the domestic economy and the capital market has been substantially expanded of late. In terms of absolute numbers, small and medium sized companies and venture firms account for 99.1 percent of the country's total number of enterprises. At the same time, 69.3 percent of all employees in Korea's industrial sector work for venture and small and medium sized firms.

High Risk, Few Successes

There are, however, several problems related to the current venture boom. Above all, the success rate of venture firms is extremely low while the risks involved are particularly high. The general consensus is that only about 10 percent of all venture firms end up being successful. However, this success rate appears to be higher because manpower and capital are continuing to flow into venture firms, helping them to stay afloat.

Second, it is an undesirable situation for so many people to be intent on being hired by venture enterprises. In principle, venture businesses can survive and prosper as going concerns only when they are able to develop unique and viable technology bolstered by a steady cash flow and efficient marketing of their products and services. Korea's venture business is still in its early stages, and as such, most investors are only interested in venture firms because they expect windfall gains through stock options and IPOs on the local KOSDAQ market. However, when the speculative fever cools off and their viability and profitability - or lack thereof - become clear, many such firms will inevitably be forced to close shop or drastically downsize their employees.

Third, it is worrisome that the flow of capital to venture firms has been expanded so rapidly. With the increasing trend of direct financing in recent years, firms have been able to raise investment funds by issuing additional shares or corporate bonds in the domestic capital markets. However, if the share prices of so-called smokestack industries are left to stagnate as compared to those of "new economy" venture businesses, traditional manufacturers will face higher costs in their fund-raising efforts. Korea's mainstay industrial and manufacturing sector will then face the threat of declining sales and under-utilized production facilities, which risks weakening the entire real economy.

Fourth, while it is good for Korea's venture firms to be Internet-related, such a development suggests that they may be overly focused on local consumers as opposed to international markets. In an economic sector based on information and technology, when the technical competitiveness of enterprises reaches a certain level, its business content will determine its profitability. Yet Korea's Internet-oriented firms seem bent on targeting largely domestic demand.

In order to overcome these problems and spread the country's current venture boom to other industries, Korea's financial institutions need to take on a more assertive leadership role. Recently, most commercial banks have gained invaluable experience in working closely with financially ailing firms under so-called workout plans as well as liquidating other companies faced with inevitable insolvency, while also fostering promising enterprises and helping to transform the domestic industrial structure.

"Jewels and Rocks"

In taking on a more aggressive role, financial institutions first need to differentiate between the "jewels" and the "rocks" of various sectors through detailed evaluation of the long-term potential of individual enterprises. Through such comprehensive assessment of technical competitiveness, growth potential, profitability, and future value of each enterprise, creditor banks should distinguish between promising businesses and non-viable firms in a timely manner. Because most private investors are relatively uninformed about how to analyze the viability of specific venture firms and lack access to such detailed information, banks must play a crucial role by carefully scrutinizing the business potential of venture firms.

For those venture firms that pass muster, full-fledged support should be made available. To help develop Korea's venture enterprises, it will be necessary to provide access to adequate capital, favorable loan interest rates, and a variety of financial alternatives, including direct financing.

In short, viable venture firms should be given the means to realize their business potential. Such enterprises, which are usually launched with little more than an idea and a slight technological edge, typically have only limited experience with financing, fund-raising, dealing with tax matters, or marketing their products. In addition to traditional banking services, Korea's banking industry needs to offer more integrated and all-encompassing banking services, including measures to help venture firms raise funds through the capital market and strengthen their business management, from tax considerations to business operations.
(Originally Author's writing, Korea Focus, Vol.3, 2000)